Health is at the front of our minds this time of year. Many New Year resolutions involve making healthier choices, like getting an appropriate amount of sleep, exercising more, and striving for a balanced diet. While you’re in this mode of self-improvement, why not extend these new habits to your finances as well?
Financial well-being is defined as having financial security and financial freedom of choice in the present and the future. If you’re unsure about your financial health, find out your financial well-being score by taking this test on NerdWallet.
Don’t be discouraged if you’re not as financially healthy as you’d like to be, here are a few tips to help you get your finances in order for the new year:
Create a budget.
A simple budget is a great place to start and can help you understand your financial flow. Figure out your net worth, or the difference between your assets versus how much you owe. It’s normal for your net worth to fluctuate over time, and it’s a good practice to calculate it once a year to track your progress. From there, you can create a more detailed budget to help you plan for expenses and reduce unnecessary spending. If you need help creating a budget or are looking for a template, click here.
Save for emergencies and adjust for lifestyle inflation
As your monthly surplus (or the extra money left over after paying necessary expenses) grows, you can establish a savings account for emergencies. These extra funds will take the pressure off so that you don’t have to live paycheck to paycheck when emergencies arise. It’s also important to adjust for lifestyle inflation as your net worth grows. It’s easy to spend more as you make more, but paying close attention to your budget will help you increase your savings as your income grows.
Get rid of bad debt
Bad debt is defined as debt incurred to buy things that quickly lose their value and do not generate long-term income (e.g., a daily coffeehouse cup of coffee) or debt that carries a high interest rate (e.g., payday loans and high interest rate credit cards). In order to save as much money as possible, pay off debt with the highest APR (annual percentage rate) first.
Save for retirement
Financial planners often recommend opening a retirement savings account, even if you’re currently in debt. Retirement is often overlooked when assessing financial health, but the sooner you start investing, the more your money can work for you by gaining compound interest. If you’re still in debt, investing 2 to 5% of every paycheck is a good place to start. As you pay off your debt, you can increase the amount you put towards your retirement savings. If you have the option of investing in a 401(k) at work, try to contribute the maximum amount that your employer is willing to match.